CARES Act Offers Emergency Small Business Relief
One of the central pieces of the CARES Act is the provision of $349 billion for small businesses through federally backed loans under a modified and expanded Small Business Administration (SBA) 7(a) loan guaranty program called the Paycheck Protection Program. Congress has designed the program to make funds available to qualifying businesses quickly through approved banks and nonbank lenders.
The CARES Act is designed to provide broad and targeted lending program towards small businesses including:
- Paycheck Protection Program (“PPP”) to cover payroll costs, interest costs, rent, and utilities;
- Economic Injury Disaster Loan Grants to provide an ‘immediate’ advance of up to $10,000.00 of working capital to businesses that have applied for Economic Injury Disaster Loans in response to coronavirus; and
- Entrepreneurial Development Programs
Paycheck Protection Program – General Loan Terms:
SBA will provide 100% federally backed loans to eligible small businesses. These PPP loans are being offered on the same terms, conditions, and processes as a loan made under the SBA’s current Business Loan Program. No collateral or personal guarantee is permitted to be required for a PPP loan. The interest rate on loans under the PPP is not to exceed 4%. There will be no subsidy recoupment fee associated with the loans and no prepayment penalty for any payments made. Additionally, the SBA has no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes (see below for permitted uses).
Lenders will not require collateral or any personal guarantee as security for these loans, and the interest rate cannot exceed 4%. Additionally, prepayment penalties are not allowed. The only instance in which a lender will have recourse against any individual, shareholder, member, or partner of a borrower would be when the loan proceeds are used for an unauthorized purpose. The typical SBA requirement that borrowers not be able to obtain credit elsewhere will also be waived.
A loan made under the SBA’s Disaster Loan Program on or after January 31, 2020, may be refinanced as part of a covered loan under this new paycheck protection program as soon as these new loans are made available. The CARES Act specifically allows SBA Disaster Loan recipients with economic injury disaster loans made since January 31, 2020 for purposes other than the permitted loan uses under the PPP to receive assistance under this program.
The SBA can provide these loans directly or in cooperation with private sector lenders through agreements to participate on an immediate or deferred (guaranteed) basis. Lenders authorized to make loans under the SBA’s current Business Loan Program are automatically approved to make an approve PPP loans under this new CARES Act program. As a result these can be accessed directly through lenders and will not require SBA pre-approval. The goal is to be ready to fund loans as quickly as possible. So, the best starting place for a small business seeking one of these loans is with the business’s lender.
Additionally, the Treasury Secretary may extend this lending authority to additional private sector lenders under criteria established by Treasury (including, for instance, allowing additional lenders to originate loans).
Eligible Small Businesses:
With some exceptions, eligible recipients include those “small business concerns” currently defined under the SBA, but also include any business concern, nonprofit organization, veterans’ organization, or Tribal business if it employs not more than the greater of:
- 500 employees (includes full-time, part-time, and those employed on other bases); or
- If applicable, the size standard in number of employees established by the SBA for the industry in which the entity operates.
There is a special eligibility rule for businesses in the hospitality and dining industries. For businesses with more than one physical location, if it employs 500 or fewer employees per location and is assigned to the “accommodation and food services” sector (Sector 72) under the North American Industry Classification System (NAICS), the business is eligible to receive a loan.
In addition to small businesses, sole-proprietors, independent contractors, and other self-employed individuals are eligible for these loans. Non-profits and churches designated as 501(c)(3) organizations may also participate in PPP borrowing, while 501(c)(6) organizations are not eligible.
Maximum Loan Amount:
The maximum loan amount is capped at $10 million and will equal to 2.5 times the business’s monthly payroll costs. Loan funds can be obtained and forgiven when used to cover payroll costs, interest on mortgage obligations, rent, and utilities. Under the PPP, businesses can re-hire employees they had initially laid off, as long as they can demonstrate to the lender that they were in business before February 15, 2020, and that the employee was formerly on the payroll.
Loans may be used for:
- Providing sick leave to employees unable to work due to direct effect of COVID-19;
- Maintaining payroll during business disruptions during slow-downs;
- Meeting increased supply chain costs;
- Making rent or mortgage payments; and
- Repaying debts that cannot be paid due to lost revenue.
Loan Payment Deferral Relief and Forgiveness:
The CARES Act provides that businesses that were operating on February 15, 2020 and that have a pending or approved loan application under the PPP are presumed to qualify for complete payment deferment relief (for principal, interest, and fees) for 6- months to one year. Lenders are required to provide this relief during the covered period (if secondary market investors decline to approve a lender’s deferral request, the SBA must purchase the loan).
The CARES Act’s broader loan forgiveness provision in Section 1106 provides that the debt may be forgiven (and excluded from gross income) in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the covered period:
- Payroll costs;
- Interest payments on mortgages;
- Rent; and
- Utility payments.
Forgiveness amounts will be reduced for any employee cuts or reductions in wages.
The reduction formula for fewer employees is:
- The maximum available forgiveness under the rules described above multiplied by:
- The average number of full-time equivalent employees (FTEEs) per month – calculated by the average number of FTEEs for each pay period falling within a month – during the covered period divided by:
Either (at election of the borrower):
- Average number of FTEEs per month employed from February 15, 2019 to June 30, 2019; or
- Average number of FTEEs per month employed from January 1, 2020 until February 29, 2020;
Or, for seasonal employers:
- Average number of FTEEs per month employed from February 15, 2019
- until June 30, 2019.
This formula will be used to reduce forgiveness amounts, but cannot be used to increase them.
For reductions in wages, the forgiveness reduction is a straight reduction by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the employee’s salary/wages during the employee’s most recent full quarter of employment before the covered period. “Employee” is limited, for purposes of this subparagraph only, to any employee who did not receive during any single pay period during 2019 a salary or wages at an annualized rate of pay over $100,000.
There is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020. Specifically, in the following circumstances, the forgiveness reduction rules above will not apply to an employer between February 15, 2020 and 30 days following enactment of the CARES Act:
- The employer reduces the number of FTEEs in this period and, not later than June 30, 2020, the employer has eliminated the reduction in FTEEs; or
- There is a salary reduction, as compared to February 15, 2020, during this period for one or more employees and that reduction is eliminated by June 30, 2020 (it is unclear whether this is also intended to be limited to employees who made under $100,000 in 2019).
- Employers with tipped employees (as described in the Fair Labor Standards Act) may receive forgiveness for additional wages paid to those employees. Also, emergency advances received under the expanded SBA Disaster Loan Program discussed below will be excluded from forgiveness amounts.
Business borrowers seeking forgiveness of amounts must submit to their lender:
- Documentation verifying FTEE on payroll and their pay rates;
- Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
- Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
- Any other documentation the Administrator may require.
Additionally, grant money will be made available to loan applicants and certain small businesses, such as:
Economic Injury Disaster Loan Grants:
Businesses who have applied for an Economic Injury Disaster Loan in response to coronavirus may, during the 2020 fiscal year, request an advance of up to $10,000 (which does not have to be repaid, even if the loan application is later denied) to provide covered leave, maintain payroll, and pay debt obligations. Advances are to be made by the lender within three days of an application for such advance.
Entrepreneurial Development Programs:
Grants and funding will be available through this program to offer training, counseling, and assistance to small businesses affected by a coronavirus. Examples of recipients will include Small Business Development Centers, Women’s Business Centers, Minority Business Centers, and resource partner associations that provide online information and training. Under this program, participants in the State Trade Expansion Program (STEP) can gain access to federal grant funds appropriated to them for fiscal years 2018 and 2019 to remain available for use through fiscal year 2021. STEP participants will also be reimbursed for events cancelled due to coronavirus, as long as the reimbursement amount does not exceed the participant’s federal grant amount.
The CARES Act provides much needed stimulus to individuals, businesses, and hospitals in response to the economic distress caused by the COVID-19 pandemic. The CARES Act is, however quite long and complex, and successful navigation of the Act’s provisions as well as the economic challenges facing individuals, business and the healthcare system will require thoughtful and comprehensive planning. This is a summary of a complex new law and business are encouraged not to rely on this summary alone and to seek legal counsel regarding this new law.
We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.
Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or email@example.com.